Property, Plant, and Equipment (PPE) & Depreciation Lecture Notes

Comprehensive vocabulary flashcards covering acquisition, capitalizable costs, modes of acquisition, revaluation, depreciation methods, and derecognition of Property, Plant, and Equipment.

Property, Plant, and Equipment (PPE)

Tangible items that are held for use in the production or supply of goods or services, for rental to others (excluding Land and Building held as Investment Properties), or for administrative purposes, and are expected to be used during more than one period.

PPE Recognition Criteria

The standard requiring an item of PPE to be recognized as an asset if, and only if, it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.

Land Cost

All expenditures incurred to acquire land and prepare it for its intended use, including purchase price, title search fees, attorney fees, clearing, grading, draining, assumed liens, and permanent landscaping.

Land Improvements

Additions with limited useful lives—such as walkways, fences, and parking lots—that are recorded separately from Land and depreciated over their useful lives.

Net Demolition Cost

The net cost calculated as Demolition Cost minus Salvage Value, which is added to the Cost of Land when land is acquired with an old building that must be demolished.

Building Cost

All expenditures directly related to acquiring or constructing a building and bringing it to its intended use, including direct materials, direct labor, overhead, professional fees, building permits, and basement excavation costs.

Equipment Cost

All expenditures incurred to acquire equipment and prepare it for operational use, calculated as Purchase Price + Costs to Acquire + Costs to Prepare for Use.

Purchase Discount Lost Account

An expense account charged when cash discounts on PPE acquired on account are not taken within the discount period.

Lump-Sum Purchase

The acquisition of multiple assets for a single purchase price, where the total cost is apportioned among individual assets based on their relative fair values.

Commercial Substance

A characteristic of an exchange transaction present when the entity's future cash flows (risk, timing, and amount) or entity-specific value change significantly relative to the fair value of the assets exchanged.

Trade-In Value Basis

An alternative measurement for trade-in transactions calculated as the agreed trade-in value of the asset given plus cash paid.

Abnormal Waste

Costs of wasted materials, labor, or overhead beyond normal tolerances incurred during self-construction that cannot be capitalized as PPE and must be recognized as a loss.

Donated Capital

An equity account credited at fair value when an asset is acquired through donation from non-shareholders, minus any directly related registration or legal fees.

Subsequent Expenditures Capitalization Rule

The rule stating that subsequent costs are capitalized as asset additions or improvements if they increase future service potential (extend life, increase capacity, or improve efficiency); otherwise, they are expensed as ordinary repairs.

Additions

Major physical expansions, enlargements, or extensions of an existing asset that represent expenditures increasing future service potential and are capitalized.

Improvements (Betterments)

Modifications or alterations that enhance asset service life or capacity by replacing existing components with superior quality parts.

Replacements

Substitutions of an asset or part with items of equal or lesser quality.

Extraordinary Repairs

Major nonrecurring repairs involving significant expenditures that extend the useful life of an asset and are capitalized.

Ordinary Repairs

Minor recurring maintenance and repairs involving small costs that maintain normal operating efficiency and are expensed immediately.

Cost Model

An accounting policy choice for subsequent measurement where PPE is carried at historical cost less accumulated depreciation and any accumulated impairment losses.

Revaluation Model

An accounting policy choice where PPE is carried at a revalued amount, equal to its fair value at the revaluation date less subsequent accumulated depreciation and impairment losses.

Depreciation

The systematic allocation of the depreciable amount of a Property, Plant, and Equipment asset over its estimated useful life.

Physical Depreciation

Asset deterioration caused by wear and tear from active operations, nonuse, action of elements, accidents, or natural decay.

Functional (Economic) Depreciation

Asset value decline arising from technical obsolescence, market shifts, or operational inadequacy to perform efficiently.

Depreciable Amount

The historical cost of an asset (or other substituted amount) less its estimated residual value.

Residual Value

The net estimated amount an entity would currently obtain from disposal of an asset, after deducting estimated disposal costs, if the asset were already of the age and condition expected at the end of its useful life.

Useful Life

The expected period of time over which an asset is available for use by an entity, or the number of production/service units expected to be obtained from the asset.

Straight Line Method

A depreciation method allocating the depreciable amount uniformly over estimated useful life as a constant annual charge: $\text{Annual Depreciation} = \frac{\text{Depreciable Amount}}{\text{Useful Life}}$.

Composite Method

A straight-line depreciation variation applied to a group of dissimilar assets with varying useful lives treated as a single unit without separate accumulated accounts.

Group Method

A straight-line depreciation variation applied to a group of similar assets with comparable useful lives treated as a single unit.

Working Hours Method

A variable charge depreciation method calculating periodic charges based on actual operational hours: $\text{Rate per Hour} = \frac{\text{Depreciable Amount}}{\text{Estimated Service Hours}}$.

Output or Production Method

A variable charge depreciation method allocating cost based on physical units produced: $\text{Rate per Unit} = \frac{\text{Depreciable Amount}}{\text{Estimated Units of Output}}$.

Sum-of-Years'-Digits (SYD) Method

An accelerated depreciation method applying decreasing fractions based on remaining useful life over the sum of digits formula $\text{SYD} = \frac{n(n+1)}{2}$.

Declining Balance Method

An accelerated depreciation method applying a constant rate against the declining carrying amount each period, using rate formula $\text{Rate} = 1 - \sqrt[n]{\frac{\text{Residual Value}}{\text{Cost}}}$.

Double Declining Balance Method

An accelerated depreciation method applying twice the straight-line rate ($\frac{100\%}{\text{Useful Life}} \times 2$) directly against the net carrying amount.

Inventory Method (Depreciation)

A specialized method for small, inexpensive assets (e.g., tools) where end-of-period asset valuations are subtracted from starting balances to record direct write-offs without an accumulated depreciation account.

Depreciated Replacement Cost (Sound Value)

The current purchase price of an asset minus accumulated depreciation based on replacement cost, representing revalued carrying amount when fair value is unavailable.

Revaluation Surplus

An equity component recognized in Other Comprehensive Income (OCI) representing the excess of an asset's revalued sound value or fair value over its carrying amount.

Proportional Approach

A revaluation accounting approach where accumulated depreciation is restated proportionately with the change in the gross carrying amount of the asset.

Elimination Approach

A revaluation accounting approach where accumulated depreciation is cleared directly against the gross carrying amount before restating the net asset value.

Piecemeal Realization

The gradual transfer of revaluation surplus directly from equity to retained earnings over an asset's remaining useful life as depreciation is recognized.

Derecognition

The removal of an item of PPE and its accumulated depreciation from financial statements upon disposal or when no future economic benefits are expected from its use or disposal.

Assets Held for Sale (PFRS 5)

Noncurrent assets available for immediate sale in present condition within one year, reclassified from PPE to current assets, measured at the lower of carrying amount or fair value less cost of disposal, and not depreciated.

Idle or Abandoned Property

Noncurrent assets temporarily idle or intended to be abandoned at the end of their economic life, which remain in PPE and continue to be depreciated.